The 340B Drug Pricing Program is one of the most powerful financial tools available to qualifying hospitals. Eligible covered entities can purchase outpatient drugs at prices that average 25% to 50% below wholesale acquisition cost — savings that, for a large health system, can reach into the tens of millions of dollars annually.

But the 340B program is also one of the most complex and heavily scrutinized areas of hospital pharmacy management. HRSA audits are increasing. Manufacturer restrictions are expanding. And the consequences of non-compliance — repayment obligations, corrective action plans, and program termination — are severe.

After working with 340B programs at hospitals across the country for nearly four decades, I have seen both the tremendous upside of a well-managed program and the painful consequences of one that is not. Here is what every hospital pharmacy director needs to understand.

The 340B program is available to specific categories of covered entities defined by federal statute. For hospital pharmacies, the primary qualifying categories are:

• Disproportionate Share Hospitals (DSH) — hospitals that serve a high proportion of low-income patients, as measured by the DSH adjustment percentage
• Children's Hospitals — freestanding children's hospitals that meet specific criteria
• Critical Access Hospitals — rural hospitals designated as critical access facilities
• Rural Referral Centers and Sole Community Hospitals — specific rural hospital designations
• Federally Qualified Health Centers (FQHCs) and look-alikes
• Ryan White HIV/AIDS Program grantees and certain other safety-net providers

Eligibility is not permanent. DSH hospitals must recertify annually, and eligibility can change if your DSH adjustment percentage drops below the threshold. Maintaining current eligibility documentation is a foundational compliance requirement.

The 340B program operates on a set of fundamental requirements that covered entities must meet to participate. Violations of these requirements are the basis for most HRSA audit findings.

340B drugs can only be dispensed to patients of the covered entity. HRSA's patient definition requires that:

• The individual receives a health care service at the covered entity
• The covered entity maintains records of the individual's care
• A provider at the covered entity is responsible for the individual's care and has prescribed the drug

This sounds straightforward, but it creates real complexity in practice. Contract pharmacy arrangements, outpatient referrals, and multi-site health systems all create situations where patient eligibility is not always clear-cut. Your 340B program needs documented policies for determining patient eligibility, and those policies need to be applied consistently.

The 340B program prohibits covered entities from receiving both a 340B discount and a Medicaid rebate on the same drug unit. This is the "duplicate discount" prohibition, and it is one of the most common sources of 340B compliance problems.

Managing the duplicate discount prohibition requires split billing — a process that separates 340B-eligible claims from Medicaid claims to ensure that 340B-purchased drugs are not billed to Medicaid. This is technically complex, and the implementation varies depending on whether you are using an in-house pharmacy, contract pharmacies, or a combination.

If your split billing system is not working correctly, you are either leaving 340B savings on the table (by not purchasing eligible drugs at 340B prices) or creating duplicate discount liability (by billing Medicaid for 340B-purchased drugs). Either outcome is a problem.

340B drugs cannot be diverted to individuals who are not patients of the covered entity. Diversion is a serious compliance violation that can result in immediate program termination.

In practice, diversion risk is highest in contract pharmacy arrangements, where 340B drugs are dispensed through a retail pharmacy that serves both 340B-eligible patients and the general public. Robust contract pharmacy oversight — including regular audits of dispensing records — is essential for managing diversion risk.

Many covered entities extend their 340B program through contract pharmacy arrangements, allowing patients to fill 340B prescriptions at retail pharmacies. Contract pharmacy arrangements can significantly expand patient access and program savings — but they also significantly expand compliance complexity.

Key requirements for contract pharmacy compliance:

Written agreement. Every contract pharmacy arrangement must be documented in a written agreement that meets HRSA's requirements. The agreement must specify the covered entity's oversight responsibilities and the pharmacy's obligations.

Registration. Every contract pharmacy location must be registered with HRSA in the 340B database. Unregistered contract pharmacies are a common audit finding.

Auditing. Covered entities are responsible for auditing their contract pharmacies to ensure compliance with 340B requirements. This means reviewing dispensing records, verifying patient eligibility, and confirming that split billing is functioning correctly.

Manufacturer restrictions. Since 2020, many manufacturers have implemented restrictions on 340B pricing at contract pharmacies. These restrictions are legally contested, but in the current environment, covered entities need to track which manufacturers are restricting contract pharmacy access and manage their purchasing accordingly.

HRSA conducts audits of covered entities on an ongoing basis. Audits can be triggered by manufacturer complaints, whistleblower reports, or random selection. The best defense against an audit finding is a program that is genuinely compliant — not one that is scrambling to document compliance after the fact.

What HRSA auditors look for:

Patient eligibility documentation. Can you demonstrate that every patient who received a 340B drug meets the HRSA patient definition? This requires complete medical records, prescription records, and dispensing records that can be linked to a specific patient encounter at your facility.

Split billing accuracy. Is your split billing system correctly separating 340B claims from Medicaid claims? Auditors will test this by sampling claims and tracing them through your billing system.

Inventory management. Are you maintaining adequate records to demonstrate that 340B-purchased drugs were dispensed to 340B-eligible patients? This is particularly important for in-house pharmacies that use virtual inventory or accumulation models.

Contract pharmacy oversight. If you use contract pharmacies, can you demonstrate that you are actively overseeing their compliance? Auditors will review your contract pharmacy agreements, your audit records, and your corrective action documentation.

The goal is not just compliance — it is maximizing the financial benefit of the program within the compliance framework. Here are the strategies I have seen work best.

Optimize your eligible patient population. Many covered entities are not capturing all of their eligible 340B volume because their patient eligibility determination process is too conservative. Work with your 340B administrator to review your eligibility criteria and ensure you are capturing all patients who genuinely qualify.

Expand your formulary coverage. Some covered entities limit their 340B purchasing to a subset of their formulary. A comprehensive review of your formulary against 340B pricing can identify additional savings opportunities.

Monitor your split billing performance. Run regular reports on your split billing system to verify that it is functioning correctly. Look for patterns that might indicate a system configuration problem — for example, a higher-than-expected rate of claims being classified as non-340B eligible.

Stay current on manufacturer restrictions. The landscape of manufacturer contract pharmacy restrictions is changing rapidly. Maintain a current list of restricted manufacturers and adjust your purchasing strategy accordingly.

The 340B program is complex enough that even well-intentioned, experienced pharmacy teams can develop compliance gaps without realizing it. An independent review by someone who has audited 340B programs across many different covered entities brings a perspective that internal staff simply cannot replicate.

At IMC Pharma, our 340B program reviews assess patient eligibility documentation, split billing accuracy, contract pharmacy compliance, and audit readiness. We identify gaps before HRSA does — and we help you build the systems to keep those gaps from recurring.

If your 340B program has not been independently reviewed in the past year, I would encourage you to schedule one. The savings potential of a well-managed 340B program is too significant to leave to chance.

Michael Samojla is the CEO of IMC Pharma and a nationally recognized expert in hospital pharmacy inventory management with 38 years of experience serving more than 1,000 healthcare facilities. IMC Pharma serves Premier Inc. member hospitals and VA Medical Centers nationwide.